Victoria Silchenko has been a staunch propopent of the benefits of crowdfunding and alternative finance since day one. The founder of Metropole Capital Group and the Global Alternative Funding Forum, an annual event that brings together many prominent names in the Fintech sector, Silchenko has charted a mission to bridge the worlds of alternative and traditional finance to foster entrepreneurship, innovation and diversity. This years event, which takes place next week in Los Angeles, will be even more meaningful as recent updates to securities regulations have improved access to capital for small and emerging companies.
Recognizing that the US is in the midst of a contentious Presidential election, Silchenko is “crowdsourcing” a letter to be sent to the next administration. This message to the next occupant of the White House will highlight what policies the entrepreneurial community would like to see – and frankly need. Silchenko believes it is imperative to work together in collaboration to foster meaningful innovations that drives economic growth and opportunity.
Crowdfund Insider recently reached out to Silchenko, who has a Phd in Economics, to learn about her perspective on the emerging Fintech market and the potential of investment crowdfunding.
Crowdfund Insider: You are preparing for your 5th annual event. What has changed in the alternative finance sector over the past five years? What has improved?
Victoria Silchenko: I feel there has been a great deal of enthusiasm in the community as now we are experiencing historical momentum where technology, after disrupting just about every part of our lives, is now dramatically impacting the venture financing industry – while regulations, finally, are catching up. Why is this so important for everyone? Well, let me share with you one of my favorite formulas.
As an economist by education, I was fortunate to work in the early days of my career at Michael’ Milken’s think-tank. His legendary high-end and high quality Global Milken Conference has become my inspiration and personal benchmark for launching the Global Alternative Funding Forum, only with a “little’ re-adjustment as my program is designed for entrepreneurs and next generation financiers rather than Fortune 500 CEO’s or hedge fund managers. While working with Michael Milken, I learned about the formula for prosperity that he developed:
P = Ft (HC + SC + RA)
The formula applies in any economic cycle and declares that prosperity (P) equals the effect of Financial technologies (Ft) acting as a multiplier on the total value of Human Capital, Social Capital, and Real Assets (aka balance sheet items).
While the formula itself might be an interesting topic for a whole separate discussion, I certainly agree that fintech is a great tool to spread – and multiply – the benefits of human, social and financing capital to as many people as possible (read: democratization of capital).
So, there is no surprise that after the financial crisis we have witnessed an unprecedented growth of alternative finance which – with the rise of fintech and new regulations – has formed a whole new industry called crowdfunding and defined new asset classes. The crowdfunding platforms raised $2.7 billion in 2012 and $34.4 billion in 2015 worldwide with predictions of growing further at a compounded average annual rate of 27% during 2016-2020 (FYI: Technavio’s Global Crowdfunding Market)
The only market that I can think of that might surpass such a drastic growth is legal marijuana sales which are predicated to grow by a compounded average annual rate of 30% between 2016 and 2020. I’m just saying…
BTW, while I am extremely excited to report the boom of the crowdfunding industry and its promising future, we have to remember that it still consists primarily of reward and donation based models which are still contributing to the overall industry growth the most. Such models by nature are much closer to charities and non-profits and you might be surprised to know that last year individuals donated roughly $258 billion in form of gifts and aids. Even if we “discount” the amount by 30% of donations that go to religion, it still beats the amount of VCs and angels investments which were $59 billion and $24 billion accordingly.
And here is an interesting exercise I would like to share with you. The cumulative amount of funding pledged on Kickstarter, the leading rewards/donation crowdfunding platform, has reached $2.7 billion in October 2016. The platform was operational from 2012 so I took the most recent data which shows that from May-June 2016 people donated via Kickstarter about $240 million.
My goal was to compare the data with Regulated Crowdfunding which was brought to us by the Title III rule and became effective in May this year.
One might assume that after so many years of anticipation and quite rich coverage by the media the crowd, AKA the new generation of financiers, would rush to platforms that offer a piece of equity rather than t-shirts.
However we’ve got a very slow start where May – October 2016 the crowd invested just a little over $11 million (with WeFunder as the leading platform controlling 70% of market share).
I’ve found this fact to be quite fascinating asking myself a metaphysical question: are we all motivated by a keen desire to help “bring creative projects to life” as stated on Kickstarter’s mission rather than investing with a goal of potentially making some money?
So the companies that are raising capital and pitching themselves to equity CF platforms should remember that when it goes to start-up financing, people are rather looking for impactful and Good companies. With a capital G. Just ask millennials—who will account for 75% of the workforce in 2025. There are plenty of reports confirming they are not motivated by money but rather impact and sustainability.
Meanwhile, from what I observe the platform owners have an extremely hard time finding high quality projects – in fact, most of the platforms have recently started to offer so called “scout programs” with up to $2,500 in fees for a company referral.
But I am still optimistic and you know why? Because I believe wiring the public finance and investment possibilities via the Internet is a very natural – and crucial step in the new digitalized economy and we needed to re-write the rules. The key thing to remember – for the first time in financing history, the founders and entrepreneurs can build their brand’s loyalty via customer stock ownership.
Crowdfund Insider: With Titles II, III & IV all actionable now, how do you think the crowdfunding sector is progressing?
Victoria Silchenko: As one of the first supporters of the JOBS Act and being an equity crowdfunding evangelist, I am happy to see that regulations are finally emerging from the dark ages and we got a set of thoughtfully-defined asset classes that converge with the age of the digital economy and network effects. The diverse nature of the crowdfinance industry means that a wide variety of businesses and projects will find their way to the appropriate funding source – and that’s what was missing in the traditional financing system.
Entrepreneurs with a workable business should be able to turn their customers into shareholders without being limited by the accredited investors rule. Welcome to the 21 century.
Crowdfund Insider: Not too long ago you questioned the viability of Reg A+ for early stage companies. Do you still believe that holds true?
Victoria Silchenko: I certainly can reconfirm that Reg A+ where, depending on which tier/set of the rule the company is following, one can raise up to $20 million – $50 million per year, is a fit for a more mature businesses. The budget for legal fees might easily go over $200k but what might be even more “damaging” – marketing expenses.
My point that I keep repeating – the low hanging fruit is turning the existing customers into shareholders – who, via network effects, will help to attract more shareholders, more customers or both. With no customers, marketing expense might kill you much faster than legal expense. If anyone advertised recently on LinkedIn, they might know that the pay-per-click rate might run as high as $8- $12. Elio Motors that has been featured as a Reg A+ poster-child has reported $925K in marketing expense on March 2015 and $1.6M a year later on March 2016.
Finally, I believe the issuer should have a certain level of financial proficiency, feeling comfortable with the disclosure and understand the liability bargain.
One of my clients whom I am advising on a financing strategy is currently getting ready for Tittle III crowdfunding and our plan – once the company is “graduated” with Regulation Crowdfunding – is to move up to the Reg A+ patch.
Crowdfund Insider: What about Reg CF and the push to improve upon the existing mandates under the exemption. What do you believe needs to be improved?
Victoria Silchenko: These days, when I read an article on Reg CF – or listen to an interview on the same topic – I have to make sure to check out who is “the messenger”. I’ve found that a lot of such pieces are biased and if someone owns an accredited equity crowdfunding platform, or for example his platform is focusing exclusively on Reg A+, you’ll hear nothing but cons about Regulation Crowdfunding.
Of course there are some cons – the model is new, ladies and gentlemen. So I can certainly understand the frustration and complaints about the fundraising limits (up to $1 million a year) and the potential costs associated with fundraising for companies on a start-up budget. But I believe we are at the very early “testing the water” stage and once armed with some data we will be able to prove to the SEC the viability of raising the limits to up to $5 million via the Fix Crowdfunding act initiative.
Meanwhile, the fundraising approach can be a hybrid one where you can also look for additional capital sources utilizing, for example, accredited crowdfunding, royalty financing, P2P, etc. And again, your marketing expense while targeting new customer can also cover the marketing expense of targeting potential shareholders.
Crowdfund Insider: Do you see a secondary market evolving for crowdfunded securities?
Victoria Silchenko: Great question! I remember an interview with Mark Cuban a while ago who was telling that the problem with crowdfunded businesses is that they have zero liquidity. First of all – how about old-fashioned dividends paid model?
As for secondary markets, here are my two words AKA two cents: early exits.
See, in 2000 the time to exit for a U.S. venture-backed company dipped to about 2 years and since then exit times have gradually climbed to where they are now at 7-12 years.
As technologies have undeniably sped up the pace of our lives, I am convinced that Regulation Crowdfunding model is set to accelerate the rate at which new-born businesses can create values driven by buyers with much less craving for mega exits and quite possibly with much more realistic expectations than venture capitalists.
And the JOBS Act/equity crowdfunding has triggered a rapid development of other ways to maintain liquidity and sell shares via:
- auction-based platforms (such as NASDAQ Private Market or SharesPost)
- alternative trading platforms like OTC Markets (can be used as an exit platform for those proceeding with Reg A+; Regulated Crowdfunding can be upgraded to Reg A+)
- via direct secondary funds (specialized private equity or alternative investment funds)
- via exchange funds (private placement limited partnerships or LLCs specifically designed for investors with concentrated positions in highly appreciated or restricted stock)
BTW, Eric Ries, the author of the legendary ”The Lean Startup” has announced his plans to build the Long-Term Stock Exchange and although I am sure it will take a few years to see the LTSE being operational, I like to see the initiative of moving from short-term thinking to the impactful model.
I am also witnessing already a rapid development of seed-stage funds, AKA “micro VCs,” which are more flexible than traditional VC funds ($100m-$350M) and which can write smaller checks – and therefore are more inclined to work with a broader range of companies.
And here is the catch – given an ongoing development of secondary markets, such funds can be focusing on profitability rather than high-growth which is typically required by a stock exchange.
The whole topic is fascinating that’s why I am very excited to have among our speakers this year Cromwell Coulson, President, CEO & Director of OTC Markets Group, Inc. (OTCQX: OTCM), Andrea Lamari, Director, West Coast NASDAQ Private Market™ and David Weild, Chairman & CEO at Weild & Co., the “father” of the JOBS Act. I am also thrilled to have Arthur Lipper, a Wall-street legend and a fintech investor, on-board for a second year in a row who will make his presentation on royalty based financing and investing – one more alternative funding option, especially if the exit is not on the plate.
Crowdfund Insider: What other areas of Fintech do you believe are exceptionally promising?
Victoria Silchenko: This is the billion dollar question. Investments in Fintech tripled in the U.S. in 2014 over 2013 hitting $9.9 billion spread over 493 transactions in 2014 rising the average investment per deal to $20 million from $6 million in 2013.
I see that the most bullish on fintech are venture capitalists who appeared to be investing first and asking questions later and who are certainly up for a new frontier. But who can blame them, especially if we remember a legendary report by the Kauffman foundation where data unleashed the inconvenient truth: the average VC fund is typically losing investors’ money.
But another truth is – the major risk taker and lead investor in the entrepreneurial economy is the government (read: public money). In 2015, the money awarded to SMEs in total was $165 billion (including $91 billion on small businesses). In the same year, angel investors put $24 billion in startups and VCs invested $59 billion.
Add to this the fact that the main backer of VC funds are pension funds, which contributed 20% of the VC industry’s overhaul, and you might understand my quest for the public-private partnerships, which I predict will be the next Fintech disruption.
Crowdfund Insider: You have launched an initiative to send an open letter to the incoming administration on the importance of access to capital. Why did you decide to do this and what do you hope to accomplish?
Victoria Silchenko: As this year’s event is set to be only three days after the elections, I aim to utilize its collective knowledge beyond highly educational and forward-looking discussions on modern financing tools and we will be crowdsourcing recommendations from its participants to form a letter to the elected President of the United States.
We are non-partisan and while the government is being discussed primarily from the administrative point, especially in the year of the presidential elections, I would like to remind everyone that it is also a “crowdfunded” by us, tax-payers “fund” that is the most active financier and investor in the entrepreneurial world.
Just about every innovative poster-child company, including Intel, Compaq and Apple were advancing public funds such as SBIC or SBIR. These are companies that wouldn’t even exist without government funding and support. Elon Musk, celebrated as a genius of our time, launched his companies with very sizable government loans of over $500 million and the VC industry would.
So, as I mentioned, the truth is: the major risk taker and lead investor in innovative economy is the state (read: public money). But who gets rewards? And are we even innovating these days?
See, for innovation to flourish and make an actual inclusive impact, long-term “patient” finance is wanted. But VCs are “exit-driven” while businesses are not investing in their own businesses. Data confirms that these days companies spend more on share buybacks which help raise the overall stock price by making the remaining ones more valuable (in other words, it helps earnings per share results) than on R&D, growth opportunities or employees.
It is time to acknowledge public risk-taking, re-write the rules for modern public-private partnerships, modernize regulations and start building a new model of collaboration that would be based on three quantitative measures – risk, return and impact.
And I am very thankful for a support and leadership of industry leaders such as Amy Wan, crowdfunding and securities attorney at CrowdfundingLawyers.net, Georgia Quinn, CEO of iDisclose, Jor Law, co-founder of VerifyInvestor.com, Michael G. Homeier, founder of Homeier Law PC , Celu Ramasamy, General Partner at Focus investments, an investment fund focused on Digital Currencies and Blockchain Technology and of course your help, Andrew has been invaluable.
Ultimately, what I want to see is a state-of-the-art platform based on fintech which would allow us to build the next generation level of partnership where the government is a co-investor and crowdsources and analyses proposals from the public so it could arrive with a list of prioritized problems that require financing on a macro-level which we, entrepreneurs need to resolve.
As you see, as long as we have problems to resolve – we are not running out of jobs. And we need “patient and blended finance” to make sure that the financing industry is producing the impact it was created for in the first place instead of being dragged out to the speculative transactions. Entrepreneurship is dying across the U.S. with 400,000 companies being launched versus 470,000 vanishing each year. Access to capital is the most important factor to sustain the businesses and build an innovative economy.
One of the major driving forces of the venture capital industry, and Silicon Valley particularly, was the support offered by the government. Now we, the crowd, is asking for the support of the crowdfunding industry.